Our analysis of capital investment by the four major U.S. telecom carriers estimates that total 2014 capital investment will increase slightly (0.5%) and perhaps decline 5.2% in 2015. However, we expect wireless investment to remain strong through 2014, increasing 6.3% in 2014 year-over-year but then declining 6.0% in 2015, though there could be upside to this figure as Verizon and T-Mobile continue densification efforts. Our top carrier pick continues to be T-Mobile, which we rate at Outperform with a $40 price target.

We estimate the mix of total capital investment in 2014-2015 to be approximately 68% wireless, 30% wireline and the balance of 2% in other. Wireless investment should continue to make up the bulk of capital investment in the U.S. as video steadily increases to more than 70% of wireless traffic by 2018 from approximately 53% today.

While we anticipate that investments in legacy network infrastructure (i.e., digital subscriber line (DSL) and routing) will be flat to down, network upgrade initiatives should spur growth in several key areas. Specifically, we believe that increases in mobile traffic and data usage and the transition from legacy networks to 4G LTE will create pockets of growth. We expect good performance in LTE (including session board controller and diameter signaling controller and voice over LTE), optical, small cells and Wi-Fi. While software-defined networking and networking functions virtualization are still in early stages of adoption in carrier networks, we believe they have the potential to be disruptive and to reshape the vendor landscape.

It appears to us that capital investment by the four major telecommunications carriers in the United States will be slightly skewed to the second half of 2014. However, there are some interesting points to note. First, we anticipate that wireless spending will be more skewed toward the second half (52.6%) for the majority of the carriers except for AT&T (T), which moved more quickly to spend in the first half as it sought to complete its 300 million LTE points of presence coverage by the end of the summer. In the wireline segment, the opposite is expected to occur, and we estimate 45.6% of capital spending to be invested in second half.

Overall, we anticipate wireless capital investment in 2015 to fall 6.0% overall year-over-year compared to an increase of 6.3% in 2014. However, we caution that the carriers will likely accelerate spending in certain markets and much will depend upon the rate of mobile wireless data growth. We believe data growth will continue to rise and put upward pressure on wireless capital investment.

In wireline, which includes just the big three carriers and excludes T-Mobile, our forecast indicates a 10.5% decline in wireline investment in 2014, moderating to a 2.9% decline in 2015. However, what is not fully embedded in our estimates are the beginnings of what we believe is increasing enterprise adoption of direct connectivity to the cloud, both to and from data centers. We estimate this could begin to turn the tide in what has been recent downward pressure on wireline spending.

It is also noteworthy that full-year capital investment should consist of approximately 68% wireless, 30% wireline and the balance of 2% in other. For 2015, we anticipate a similar mix between wireless and wireline and we believe the mix of wireless will continue to make up the bulk of capital investment in the U.S. as video steadily increases to more than 70% of wireless traffic by 2018 from approximately 53% today.

It is estimated that mobile devices will exceed the number of humans on earth by the end of 2014. By the end of 2018, we believe that over 50% of traffic from mobile devices will be offloaded to fixed networks using Wi-Fi and femtocells. Further, it is estimated that 54% of all mobile connected devices will be smart devices and 96% of mobile data traffic will be generated by these smart devices by the end of 2018.

-- Ryan Hutchinson -- Michael Bowen -- Trevor Upton -- Brent Bracelin

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